Trade The Journey

Trade The Journey

Tricky Times in the Market

Top of the Morning! I wish that I could identify why the market is moving up with such force. The only idea that comes to mind is that the market is assuming that the Fed will turn dovish sooner than later. A few fed governors stated that rate hikes will continue as inflation remains higher than its two percent target. Some analysts are saying that a seventy-five basis point hike is still on the table for the next Fed meeting.

Others believe that a fifty-basis point hike will be the result of the next meeting. The latest CPI and PPI numbers show that inflation is cooling, and the rate hikes are having their intended effect. It looks like the market may also be taking the latest inflation numbers as evidence that inflation has peaked. Later in the post, I’ll review the latest inflation reports.

Each of the indices has ascended almost vertically which is great for those betting on a short-term recovery. They also reached their 200 SMA which is quite remarkable with the lows reached in June. Volatility also retreated from its high and signal that investor sentiment has or is changing. It’s just too early to say that this is another bull run with so much uncertainty in world and market events.

It’s clear that inflation will remain for the foreseeable future and with the economy slowing, we may be entering into the dreaded stagflation environment. However, with unemployment still at record lows, it may be a while before stagflation takes its hold on to the economy.

This is a tricky market environment to trade and invest in, market participants should remain cautious. If the Fed is intent on bringing inflation within a reasonable range regardless of its effect on the economy, what does that mean for the economy?

Stagflation can also be thought of as recessionary inflation. Earnings season is all but over, and companies mostly are beating earnings forecasts but not by as much as the previous quarter. One website reported that if you removed the energy sector from the earnings reports, the growth would be negative.

Crypto also recovered which is another sentiment indicator signaling that risk-taking has resumed. One experience I have shunned speaking about is selling my Ethereum holdings based on a top analysts’ comments on Twitter. Of course, I sold at Ethereum’s low, and then I watched Ethereum recover and reach close to $2000. Now, I have the cash from the Ethereum sale and will have to wait until Ethereum falls or another cryptocurrency emerges as a worthy investment.

I don’t regret the decision, it’s just a reminder that no one knows what the market will do. I don’t blame the analyst; I blame myself for taking the analyst’s words at face value and not doing the research to confirm if what he was saying was accurate. Of course, Ethereum could return to previous lows but there’s no guarantee that it will.

Economic Review

The small business optimist index rose 0.4%. The top concern for business owners is inflation. The secondary concerns listed were labor shortages and supply chain disruptions remain. Inventory shortages were reported in manufacturing, wholesale, retail, non-professional services, and transportation. Price hikes were reported in wholesale, manufacturing, construction, and retail. Labor shortages were reported in transportation, construction, manufacturing, and wholesale. Sixty-two percent of the owners reported that they were not interested in a loan.

Job openings and their plans to fill them are historically very high. But everything else is down, capital spending plans, inventory investment plans, expected real sales way down, the environment for expanding negative, interest rates rising, it doesn’t add up to an optimistic outlook.”

Productivity fell 4.6% in the second quarter. Hours worked increased 2.6% while output fell 2.1%. Labor cost rose 10.8% reflecting an increase in hourly compensation and unit labor cost. Real compensation for workers fell 4.4% due to inflation. Durable manufacturing productivity rose 6.1% and nondurable manufacturing productivity rose 5.4%.

Nonfarm business and business labor productivity remain in a contraction compared to the percentage change from a year ago. Output has contracted from the growth experienced a year ago. Companies are paying more for workers but incurring less productivity. The fourth and second quarters are the few quarters that experienced growth in productivity.

CPI was unchanged from the previous month while core CPI rose 0.3%.  The gasoline index showed the largest decrease in prices with Energy falling as well. Food beverages rose 1.1%, displaying the largest increase in July. The food at home index rose 1.3% and the food away from home index rose 0.7%. Fruits & vegetables and dairy & related products showed the largest increase in grocery store food groups. The shelter index increased slightly but not nearly as much as the previous month.

Services and durables increased slightly while nondurables fell slightly. Housing expenditures also rose slightly. Overall, most goods fell for the month of July. Has inflation reached its peak? Will the Fed be able to do enough to keep inflation from becoming entrenched?

There’s one more CPI report before the next Fed meeting, so I guess we’ll have to wait to see.

The PPI for final demand fell 0.5%. Final demand for goods fell 1.8% with most of its decrease being attributed to energy. Final demand for services rose 0.1% with most of the increase being attributed to margins for fuels and lubricants. Intermediate demand fell for both processed and unprocessed goods. Most of the fall for both processed and unprocessed goods can be attributed to the fall in prices for energy goods.

Intermediate demand prices for energy materials fell over 20% for the month of July. Services for intermediate demand rose 0.1%. Transportation and warehousing services prices can be attributed to the rise in intermediate demand for services. Each stage of intermediate demand prices fell for July. As a reminder, PPI is a measure of inflation at the wholesale level, measuring the changes in prices paid by product manufacturers and services suppliers as stated by Investopedia.

Wholesale inventories for June fell by 0.1% but is still at a 1.8% growth for the month of July. Sales rose 0.1% for the month of June. The June inventories/sales ratio fell to 1.21 from 1.26. This ratio indicates that stores have enough inventories to cover a month and a half of sales. The durable goods inventories to sales ratio was 1.67 and nondurable goods was 0.92 for the month of June. Both durable and nondurable goods inventories decline slightly for June. Sales increased slightly for both durable and nondurable goods at the wholesale level.

Consumer Sentiment improved slightly as the preliminary report for the University of Michigan was released this past week. The year ahead expected inflation rate fell to 5.0%. One interesting tidbit from the report is that high-income consumers registered a large fall in personal financial conditions and their appetite for durable goods purchases.

Mortgage applications increased from the previous week as did the refinance index. The purchase index fell from the previous week. The mortgage rate for a thirty-year fixed-rate mortgage rose four basis points to 5.47%. People are still reluctant to buy homes amid the higher home prices and mortgage rates.

Initial claims and continued claims rose slightly this previous week. The unemployment rate remains at historic lows. With the rate hikes, employment remains robust although there are some cracks beginning to appear especially in the tech industry. Some companies like Robinhood are facing tough times ahead, as Robinhood laid off 23% of its workforce.

Indices Reference Levels

Weekly Options Trade: LVS (Las Vegas Sands)

Week in Review

I received my first paycheck, and I was disappointed. A part of me feels like I made a terrible mistake accepting employment with a company that pays less than my previous job. The one thing that this company offers that my previous company did not is opportunity. Had I would have stayed at my previous company; I could have easily remained in the same position for the next five years.

I was able to save a large portion of my paycheck, so I feel good about my spending plan.  Hopefully, I’ll be able to make more as time goes on. Since my lunch is only thirty minutes, I don’t have time to venture out to buy food which has helped me to remain within my budget. I also don’t spend nearly as much on gas as I did in my previous job.

Overall, I think that with time I’ll be able to pay off my credit cards with a consistent paycheck and fewer expenses.

Grade: C

Reason: Continued adherence to my spending plan.

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